Michael Den Tandt: The faltering 'middle class' is a real issue, regardless of who wins the next election

Tired of hearing about the woes of the downtrodden middle-class? Here’s a news flash: Get used to it. As of next week’s throne speech, this pet issue of Liberal leader Justin Trudeau’s becomes the new Great Canadian Debate. Here’s why: The problem is real. And it’s not going away any time soon, regardless of who wins the 2015 election.

The “hollowing out of the middle class,” which Trudeau began speaking about last year and which is now percolating into the other federal parties, is actually a set of three closely related phenomena that economists have observed and studied, with growing interest, since the early 1980s. The first is earnings stagnation among the majority; the second is a soaring share of income for the very few top earners in society — the Occupy movement’s “one per cent.” The third is polarization, which ties the first two together. Polarization is the divergence of growth into low-wage, low-skilled McJobs at the bottom end, and high-wage, highly skilled superjobs at the top end, while the great unwashed in the middle go slowly nowhere. That would be most of us.

It’s a dagger to the heart, in other words, of the very idea of Canadian-ness, which is broad-based health and prosperity for most, if not all.

This problem is already giving Canadian politicians night sweats, driving their future planning and shouldering other issues — climate change, to name one — into the ditch. And it dictates that Federal Election 2015, to the extent it revolves around policy at all, will be about the one remedy to income inequality/stagnation that is both politically feasible and economically sound: education. Education, skills training and “strategic” learning are about to become the dominant buzzwords in Canadian politics.

Already there’s been interesting preliminary jousting, with analysts such as Laval University economist Stephen Gordon and Postmedia columnist Andrew Coyne arguing the rhetoric isn’t borne out by data, which show Canadian median household earnings rising, poverty rates dropping, and inequality flattening out; and others, such as University of Ottawa economist Miles Corak, and University of British Columbia economist Kevin Milligan, venturing that the latest numbers don’t mitigate the long-term trend, which is of steadily increasing inequality, to levels last seen in the “Gilded Age” of the late 19th century.

The case for optimism is not wrong; where you land depends on which numbers you select, and over what period. But arguably, it is incomplete. There is no question but that the picture in Canada has brightened marginally, on average, since the late 1990s. But the longer-term outlook, particularly in a global context, is not good. It shows Canadian median income growth chronically lagging OECD competitors, even as inequality — the concentration of income in the hands of a dwindling few — soars. Canada is not the worst performer. But we’re by no means any kind of standout.

In Divided We Stand, the OECD’s 2011 examination of income inequality across the developed world from the mid-1980s through 2008, Canada posted average annual household disposable income growth of just 1.1%, versus the OECD average of 1.7%. Australia, by contrast, racked up an impressive 3.6%. Other countries outperforming Canada included the United Kingdom, New Zealand, Norway, Ireland, Israel, the Czech Republic, Finland, Luxembourg, Spain, Sweden, the Netherlands, Portugal and Chile.

Moreover, even the weak gains Canadian households have posted in disposable income, over the past 25 years or so, are temporary. That’s because they stem disproportionately from women newly entering the workforce, at a time when women’s hourly wages have steadily risen.

Canadian men’s average wages over this period have stagnated, driven by the offshoring of heavy manufacturing and manual labour, work in which men were heavily represented, and declining union participation rates that hit men harder than women, because of relatively greater female representation in public service jobs. “It is a good thing that median family incomes have risen in Canada over the past 15 years,” says UBC’s Milligan. “It’s there, it’s real. But the source of that has been the catch-up of women to men. That doesn’t look like something that we can rely on looking forward.”

No one has established that soaring incomes among the super-rich cause income stagnation among the middle class. What we know is that these have occurred simultaneously. Viewed across a longer time scale, the trend is not up for debate. In a paper published in the American Economic Review in 2005, University of California (Berkeley) economist Emmanuel Saez and McMaster University economist Michael Veall used Canadian tax filer data back to 1920 to establish that the wealthiest few Canadians’ share of total income peaked just before the Great Depression, and again just before the Second World War, at about 15%. The war acted as a great leveller, due mainly to draconian wartime tax measures and enlistment in military trades, pushing that share down to 10%.

The trend continued until the mid 1980s — when the top one per cent accounted for about eight per cent of total Canadian income. Then a reversal occurred. By 2005 the top one per cent of earners accounted for 14% of total income. Currently they account for about 12%.

If the stage were set for further levelling, Trudeau’s middle-class mantra would hold little water. The wrinkle is that inequality, which has gone hand in hand with weak median income growth, has been driven by technological, political and economic changes that are global and probably irreversible.

MIT economist David Autor has cited one factor as the principal driver of polarization in the labour market: computerization and automation, which took off in the early 1980s. Other economists cite globalization, which has shifted traditional manufacturing jobs to lower-cost labour markets overseas, or the related “superstar” effect, whereby top performers, whether in business, the arts or sports, can command astronomical salaries due to their access to a global marketplace; or the wave of economic liberalization and pro-free-market reform that began in Britain and the United States in 1980, with the rise of Margaret Thatcher and Ronald Reagan, later to be joined by Brian Mulroney in Canada, in 1984.

Automation and computerization are not advances we would reverse even if we could. And liberalized, market-friendly trade is the greatest poverty eliminator in history. Just ask the Chinese, Indians, Indonesians and Brazilians. This largely explains why no “left-wing” 1990s-era successors to Reaganomics or Thatcherism — be it Democrat Bill Clinton, or Labour’s Tony Blair, or Liberal Jean Chretien — opted to roll back the ’80s wave of liberalization. And it explains why no one today in Canada, not even NDP leader Tom Mulcair, is proposing to roll it back now. Short of a social collapse followed by revolution, the cake of neo-liberal economic orthodoxy is baked.

That leaves two levers for adjusting or ameliorating levels of income inequality — one direct, one indirect. The direct route is already in wide use and is a highly effective leveller, as the University of Ottawa’s Corak and Queen’s University economist Robin Boadway noted in submissions to the House of Commons finance committee last April. That is, taxes. The highest marginal federal tax rate in Canada currently is 29% of taxable income, for anyone earning $135,054 or more. It would be simple enough for Ottawa to do as Nova Scotia did in its 2010-11 budget, and create a new, higher tax bracket for incomes above $150,000. Or there’s the oft-bandied-about idea of an inheritance tax, which Canada does not currently have. In other words, soak the rich.

Here’s why that won’t happen: The weight of opinion among economists, even those who say they are worried about the plight of the middle class, is that boosting taxes on the rich is problematic at best, and might not even yield additional revenue to the Treasury. That’s because raising taxes encourages their avoidance among people with the resources to avoid them, if not outright evade them, capital being global.

And there’s politics: With the federal Conservatives casting themselves as ultra-zealous tax cutters and champions of Main Street, neither the Liberals nor New Democrats can go there. Because only Nixon could go to China, the Harper Conservatives are the only Canadian political party with the necessary cover to impose any new tax on the super-rich. But that would stretch the bounds of political expediency and principle-trashing, even for them. At the very least it would cause a caucus revolt. The tax system can be tweaked and adjusted, to make it fairer and more efficient, but great redistributive reforms are unlikely.

Which brings us back to education — the only politically palatable means of bolstering middle-class living standards, within any kind of reasonable time frame, by better preparing Canadians to thrive in the new, post-transformation, global economy.

The Conservatives will argue, with some justification, that they’re already well ahead of the other two major parties here, with their focus on skills training, especially for aboriginal Canadians working in northern resource-related trades, and the Canada Jobs Grant. Expect them to double down on these initiatives, beginning in the throne speech.

The New Democrats will propose a skills package, very likely, modelled on the social democratic northern European countries, where organized labour and society at large play a greater role in tailoring job-training, and where inequality remains less of a problem than it is in North America (though the rising trend is in place there too). And the Trudeau Liberals will probably float an ambitious plan to overhaul post-secondary education, along lines proposed by the Rotman School of Management’s Roger Martin, whose thinking has influenced key Trudeau advisers, including inequality wonk and Toronto Grit candidate Chrystia Freeland.

The eventual reform that emerges post-2015, whichever party is in charge, can be expected to blend the best elements of all three platforms. The global trend is not in question: Canada’s relative prosperity really is at risk.

It’s a safe bet that apprenticeships in the skilled trades will figure much more prominently than they do now. Whether Tories, New Democrats or Liberals rule the roost in Ottawa, the basic reality of the Canadian economy won’t change. Mining, oil and gas and resources are the country’s most obvious path to growth for the foreseeable future. In the next decade some 100,000 new jobs are expected in Nunavut, the Northwest Territories and Yukon alone, just based on major resource projects already in the planning phase.

Mechanization, computerization and robotics have already transformed mining into something closer to space exploration than the old pick-and-shovel stereotype. Mining engineering, geology, metallurgy, will be education growth industries in Canada for the foreseeable future. But skilled trades related to resource development – welding, heavy equipment operation, pipefitting, carpentry, electrical, and the like – will also be in great demand. It will make sense to further merge those streams in co-op programs – increasing the practical skill sets of undergraduates, and adding to the theoretical knowledge of tradespeople.

Medicine, health care and all related fields, from medical lab technology to massage therapy, are guaranteed to be in short supply because of expanding demand caused by the aging baby boom; therefore we can expect proposals to continually increase the supply of doctors, nurses, registered practical nurses and physician assistants, with an emphasis on the new para-medical trades, because of their relative cost-effectiveness.

Over and above all, digitally applicable skills — mathematics and the hard sciences, including biology — will command the highest premium. The polarization described by Autor and others is not about to slow; if anything, it looks set to accelerate worldwide. The job of education will be to push Canada’s work force out ahead of that curve by, in effect, producing more “creatives” able to tap the upper end of global demand.

The policy prescriptions to watch for, at a federal level, will concern funding and access. That’s because, for any education program reform to have real impact on the living standards of the middle class, it must be broadly accessible and affordable. Based on their historical inclinations, the NDP will likely adopt a union-centric approach; the Conservatives, a business-centric model and the Liberals a university-centric one. Ideally, all three approaches will converge in the middle. Because the Conservatives are no fools, some of that will begin to emerge in policy well before the 2015 election.

Bottom line: There is no magic bullet that can make Canadian middle-class households more prosperous. But there will be opportunities in the foreseeable future for those who want to learn, to do so, with enhanced help from government. That will be the principal contribution of this debate, after the rhetoric has come and gone. Is it sexy? Is it immediate? Not even close. But it’s arguably not a bad national project, given that politicians’ first rule should be to do no harm.